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Who Does the Home Loan Rate Hikes Hurt More?

Who Does the Home Loan Rate Hikes Hurt More?

An interest rate hike hurts all borrowers. For the same service( loan), you must pay further every month. Or pay the same quantum but for a longer period. Neither is a desirable outgrowth for a borrower. And yes, the rate hikes hurt the borrower running a tight budget a bit more. In similar cases, the capability to handle an increase in EMIs is rather low. In this post, let’s explore a different digression and look at the impact of rate hikes on borrowers for different home loan tours.

Your home loan is like a floating rate bond for the bank. Yes, the bank is the investor then. And the present value of all your EMIs blinked at the prevailing loan interest rate shall amount to the current loan outstanding. When the loan interest rate goes up, the present value of your EMI payments comes down. But the bank won’t collect anything lower. therefore, to make up for the increase in the reduction rate, you have 2 options

  1. Pay the same EMI for a lesser number of times( EMI unchanged but increased in the loan term) OR
  2. Pay an advanced EMI for the same number of times( Loan term unchanged but an advanced EMI)

still, is the increase in EMI or the increase in loan term the same for all the home loan tours?

As you can see, the more advanced the loan term, the lesser your perception of interest rate movements. In case of interest rate hikes, the borrowers with longer loan tours suffer further. In chance terms, the EMI hikes are advanced or term extensions are longer.
The results aren’t surprising. As a borrower, you pay an advanced interest rate on your loan when the rates go up. easily, if the term is longer, you must pay an advanced interest rate for a longer period. And therefore, you anticipate the impact to be advanced.

What Do You Do to Reduce the Impact?

We’ve seen, the longer the loan term, the lesser is your perception to rate hikes. Hence, if you’re much upset about the impact of interest rate hikes on your loan EMI, you must reduce the loan term aggressively. And how do you reduce home loan terms? By part compensating the loan on a regular base. There’s no other way.
Well, there’s another reason why your loan term can go down. An interest rate cut. But you don’t control it. That’s just luck. You formerly know that. Don’t you?
The mathematics behind reducing balance loans is so simple that the source of all favorable effects is either loan repayment or an interest rate cut.
Long-term Is Not Always Bad
A long-term isn’t inescapably a bad thing. In fact, it gives you further inflexibility. And the EMI is also lower.
before in this post, we considered a script where the interest rate increased. And the borrowers with the longer term witnessed lesser pain. Now, let’s see the impact if the interest rates were to go down.

1 thought on “Who Does the Home Loan Rate Hikes Hurt More?”

  1. Thank you for some other great post. Where else may anyone get that kind of information in such a perfect approach of writing? I’ve a presentation subsequent week, and I am on the look for such information.

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